Hiring Contractor for Kitchen/Bath remodel
sfls
September 22, 2013 in Other
What's normal? I've learned contractors often get a 30% discount on materials (cabinets, tile, fixtures, etc) that they may or may NOT pass on to their customer. My contract (not yet signed) provides 'allowances' plus 10% markup on the total job for his 'profit'. 30% off the allowances plus taking off his 10% from that is 1/3 of the total cost of our project. Seems a pretty steep profit (40%) to me. What's up with this????
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PRO
Dytecture
Contractors get discounts on materials due to the volume they buy from suppliers. It's up to the individual company if they want to pass along the savings to their customers. But usually they will get the money from the customer one way or another.
September 22, 2013 at 5:18pm   
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PRO
Linda
Trade discounts vary by supplier, so don't use 30% as a hard and fast number. Also, I don't understand your 10% figure...if this a time and materials contract? Or, are you guessing that he added 10% on top of expected costs for his profit.

There's a variety of ways that contractors bid, depending on the situation. Some guys put overhead costs into their hourly rate and then allow only a small contingency after estimating hours. Others will bid their jobs at a lower labor rate and then add in a high percentage for overhead at the end...doesn't matter, a $30,000 job is a $30,000 job regardless of how the numbers are allocated.

Everything is negotiable until the contract is signed; if you think the bid is too high, negotiate. But, the fact that you're concerned about the amount of profit you expect the contractor will get is a red flag to me. If you trust the contractor, checked out his work and verified his references, then does the amount of his profit really matter to you? If you had a contractor A estimating one week and contractor B estimates 4 weeks and both give you the same total price, is A ripping you off?

There are some scam artists out there, but most contractors I know are reasonable people who work hard for their money. Sure, the really good guys make very good money...but that's the case in every field. Would you go to the lowest priced surgeon and cheapest hospital for your heart surgery? Your home deserves a good surgeon as well.
September 22, 2013 at 7:23pm        Thanked by sfls
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PRO
Deborah Butler, Brickwood Builders
The key is to understand how the allowances are first estimated and put into the contract and then how are they settled at the end. The contract should be specific. If it is not, then ask for it to be better defined. Our contract specifies that the cost of materials is what we actually pay plus the cost of shipping if incurred, sales taxes and any delivery fees actually incurred. If installation fees for a sub are included in the allowance, our contract specifically states it is and why labor is being included in an allowance. It is in the best interest of the contractor and the consumer to have a clear understanding prior to signing an agreement.

There is no one way that contractors price - just like any business they have to recover all of their costs plus make a profit in order to be an ongoing company. Each may arrive at it a different way, but a business is not a healthy, ongoing business unless pricing includes some amount of recovery for overhead and profit. This is the same as any other business in any industry, profession, trade, restaurant or retail operation.

I highly doubt most contractors are operating at a gross margin of 40%, but even if they were that would not be out of line with industry related businesses such as Lowes Home Improvement, Home Depot and others that operate with approx. 35% gross margin. A gross margin also is before all overhead is paid (rent, gas, insurance, telephone, utilities, office supplies, computers, office staff, etc.) so the net profit after paying for overhead is generally extremely small.

BTW, it must vary greatly depending upon location. We do not receive discounts as high as 30% from any supplier.
September 25, 2013 at 3:04pm        Thanked by sfls
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PRO
Ironwood Builders
Yep. Average NET profit industry wide in construction is 7%....laughing all the way to the bank doesn't happen in our business. There are the unscrupulous few, as in any walk of life, that take advantage of the uneducated, the old or the greedy. Most contractors (like me right now) work long and late, rise early and sweat the details, struggle to do the right thing and then get painted with that dishonesty brush....Really...because one mom goes and drowns her kids, do all moms become suspect? If you have a bad feeling about this...stop now. Open, honest communication goes two ways...and takes work from both parties.
September 26, 2013 at 9:44pm        Thanked by sfls
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